A new IR35 isn’t going anywhere and anyway, the tax liability is more lethal than HMRC penalties

Just before Budget 2021, HMRC published  guidance indicating that regarding IR35 it is their intention to allow a ‘soft landing.’

This is a dangerous stance for a tax authority to take (“we will take a light-touch approach”), because potentially the contractor market has interpreted this to mean that it can take its sweet time on implementing IR35 reform to avoid the Revenue’s penalties.

The reality is, if you are found to be non-compliant relating to the new IR35 from April 6th 2021, HMRC may be softer on you with penalties, but the financial dent from such fines will be next to nothing compared to the hit from the associated tax liabilities, writes Louise Rayner, founder and chief executive of NumberMill.

Strange days

It’s been a strange 12 months on the IR35 front. It’s been dominated by many believing that the extension of the April 2017 off-payroll rules from the public to private sector would not happen, meaning chancellor Rishi Sunak would make a last-minute U-turn and shelve the extension, again, due to covid

Any of us in the sector, that make it our business to work closely with HMRC, know that this was never going be the case. Indeed, the new IR35 legislation was put into statute in the summer and since then HMRC have run webinars explaining the rules. It has run these webinars every week.

How the Treasury sees things

From HM Treasury’s point of the view, the extra income that private sector IR35 reform will generate is certainly necessary given the backdrop of a pandemic. Furthermore, HMT believes the credibility of HMRC would be lost forever if the rules were delayed again. And it believes businesses have had more than enough time to prepare. 

So what are we experiencing, and expecting with just 20 days to go until the new IR35 is in force?

  1. Still, at this 11th hour, a significant number of end-hirers are totally unaware of the new off-payroll  framework.
  2. Some end-hirers don’t understand that they are ultimately liable, and they don’t understand that no amount of contractual ‘pushing down’ will protect them.
  3. ‘Inside IR35’ determinations made on a blanket basis are continuing. And quite rightly, genuine contractors are unhappy to receive blanket ‘inside’ determinations.  Their argument is, ‘If you are going to tax me like an employee, then give me employment rights or compensate me for my risk/reward profile.’
  4. End-hirers are often not willing to pay an enhanced rate to the contractor to compensate them for the reduction in their take-home pay.

So end-users, what’s changed?

My team and I have been hosting IR35 webinars all year. These webinars focus on a practical approach, not just a legal approach. I can understand why it is all just too complex for end-hirers to assess all their contractors. However my argument would be, what’s changed? 

IR35 legislation has been around since 1999 and its main case law principles remain the same. If you, as an end-hirer and/or fee-payer, were comfortable before to pay Personal Service Companies gross, then you should still be comfortable now!  The fundamental case law remains the same. What has changed is that you are now liable. So yes, I understand from both a risk and hassle point of view how fair and individual assessments might be onerous. Where contractors who were previously ‘outside’ are now sitting with an ‘inside’ determination, presumably the lawyers have won the day and exerted great fear into the supply chain.  

Challenges, omens and inaction

Commercially, mitigating this fear-factor is a challenge. The private sector is an ‘un-level’ playing field and you (the clients and/or fee-payer) may indeed lose contractors to organisations which are prepared to take greater care to undertake fair and individual IR35 status assessments.

Slightly ominously for contractors, in 2017, we undertook 1,200 status assessments and we found 87% to be ‘outside’ IR35. But it mattered not. They all went on to being saddled with blanket ‘inside’ IR35 assessments by their public sector engagers. It is evidence, as if it were needed, that blanket assessments aren’t fair on contractors.

Fast-forward to today, with just three weeks to go until the new IR35 is introduced and we are in touch with agencies, end-hirers and even contractors who are still yet to organise their affairs to be April 6th-ready. There has been a lot of talking but still too little action.

The real costs (and consequences) of getting IR35 wrong

Ultimately, this will result in a last-minute, mad rush and thousands of extremely disgruntled and confused contractors, only to be outdone in the disgruntled stakes by those parties who don’t sort themselves out in time.

So HMRC penalties  are likely on their way (whether soft or not), but the commercial realities of absorbing both the tax liabilities and the loss of contractors as available, accessible talent, will be far far worse.

Bear in mind, the HMRC penalty is only a percentage of the Potential Lost Revenue (PLR).

As an example, let’s say you (as a client) engaged 20 contractors wrongly as outside IR35 and they earned, say, £300 a day. Well the PLR would be all the associated taxes that had gone unpaid deemed by HMRC. This could be the Employer NIC at 13.8% and anything else unpaid (i.e. likely the difference between tax as PAYE versus PSC dividend-based taxation). 

But based on Employer NIC alone, the PLR could be approximately £828 a day. Then let’s say the contractors were engaged for a year, so that’s 252 working days in which case, you would be looking at an extremely hefty tax liability of £208,000. And let’s further say the incorrect status decisions were deemed by HMRC as ‘careless’ (see the reproduced HMRC table below), and well, then the total tax liability -- including the penalty -- could be £208,000 plus 30%. So an almost unimaginable grand total on your HMRC bill of a whopping £271,000! It all rather beggars belief.

Type of behaviour Unprompted disclosure Prompted disclosure
Reasonable care No penalty No penalty
Careless 0% to 30% 15% to 30%
Deliberate 20% to 70% 35% to 70%
Deliberate and concealed 30% to 100% 50% to 100%

Source: HMRC Penalties for inaccuracies in returns and documents.

Final thought -- contractual parties ought to be aware; insurance companies will insist they offer cover, yet they rarely cover more than £100,000 of legal costs, and then rarely cover the unpaid taxes.

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Written by Louise Rayner

Louise Rayner is an ACCA accountant who has held board level positions in a wide range of large contractor based organisations

These days she runs NumberMill, a firm of practising accountants who specialise in contractors and IR35.  Her umbrella business is also FCSA accredited.  The consultancy part of the business offers pragmatic operational advice to end hirers, agencies and contractors.

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